Worth its weight in gold? / Why some people happily pay $500 for a bottle of wine

Linda Murphy, Chronicle Wine Editor

Published 4:00 am, Thursday, August 3, 2006

Photo: Craig Lee

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EXPENSIVE03_018_cl.JPG_A story about why some wines are so expensive. Who buys these $200 trophy wines and are they ever consumed? Or just hoarded. Photo illustration of a wine-like trophy._Craig Lee / The Chronicle__MANDATORY CREDIT FOR PHOTOG AND SF CHRONICLE/ -MAGS OUT less

EXPENSIVE03_018_cl.JPG_A story about why some wines are so expensive. Who buys these $200 trophy wines and are they ever consumed? Or just hoarded. Photo illustration of a wine-like trophy._Craig Lee / The ... more

Photo: Craig Lee

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Three magnums, part of a vertical lot of 12 bottles of Screaming Eagle Cabernet Sauvignon wine are shown on display during the Napa Valley wine auction in St. Helena, Calif., Friday, June 2, 2006. The three-day event, featuring a barrel auction, an online auction and the centerpiece live auction Saturday night, raised $8.4 million in all, organizers said. (AP Photo/Eric Risberg)
Ran on: 06-08-2006
Joy Craft (far right) paid $1.05 million at Auction Napa Valley for a lot arranged by Shari and Garen Staglin (center). Ryan Seacrest (left) emceed. Another lot included a Screaming Eagle vertical.
Ran on: 06-08-2006 less

Three magnums, part of a vertical lot of 12 bottles of Screaming Eagle Cabernet Sauvignon wine are shown on display during the Napa Valley wine auction in St. Helena, Calif., Friday, June 2, 2006. The three-day ... more

Photo: ERIC RISBERG

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JC Cellars winemaker and president Jeff Cohn makes a Syrah that's a blend of grapes from France and Sonoma County. The wine sells for $135. Chronicle photo by Craig Lee

JC Cellars winemaker and president Jeff Cohn makes a Syrah that's a blend of grapes from France and Sonoma County. The wine sells for $135. Chronicle photo by Craig Lee

Worth its weight in gold? / Why some people happily pay $500 for a bottle of wine

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Only in Napa Valley -- and Bordeaux -- would 25.6 ounces of fermented grape juice sell for $500.

In June, the new owners of Screaming Eagle Winery in Oakville sent a letter to their mailing list subscribers, offering them the opportunity to purchase a three-pack of 2003 Screaming Eagle Napa Valley Cabernet Sauvignon for $1,500. That's $500 per 750-ml bottle, a price that makes Screaming Eagle the most expensive current-release wine made in America.

Word that the cost of California's original "cult Cabernet" had soared from $300 a bottle for the 2002 vintage to $500 a bottle for the 2003 caused a stir in Napa Valley, but not for very long, because at the same time, prices for Bordeaux's finest red wines from the 2005 vintage were being announced, and they were through the roof, into the sky and headed for the stratosphere, where even eagles don't dare.

The 2005 Chateau Lafite Rothschild is selling for $600 per bottle ... 2005 Chateau Margaux, $760 per bottle ... 2005 Chateau Petrus, an eye-popping $2,000 per bottle. These are the prices being paid now, for wines still aging in barrels, by people who must wait 18 to 24 months to receive their goods.

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It's called buying futures, and the process, through which Bordeaux's elite wines are customarily sold, allows buyers to reserve their wines and lock into a price now, which they expect will be less than what the bottles will sell for when they are released in 2007.

So despite the price spike, Screaming Eagle remains a relative bargain to those with the means and the collector/investor/philanthropist mind-set to pay such sums for a product made from fruit and yeast. While those investing in 2005 Bordeaux reds wait for their wines, at least buyers of the 2003 Screaming Eagle will have their bottles safely in their cellars by Halloween.

But will they drink them? Not likely. Most purchasers of these wines see them as museum pieces, to be put on display, to show off to others while saying, "Look what I've got that you don't." They're trophy wines for trophy cases.

"There are only 8, 10, 12 (California) wines that command this type of attention," says Rhett Gadke, wine director for Bounty Hunter Rare Wine & Provisions in Napa. "If you ask me if a $250 bottle of wine is 10 times better than a $25 bottle, I say no. To those who buy it, it's trophy hunting.

"It's what (Bounty Hunter owner) Mark Pope calls 'baseball card collecting.' These wines appeal to collectors and not to those wanting a bottle of wine with dinner."

California cult wines, the vast majority of them Napa Valley Cabernet Sauvignons and Cabernet-based blends, also entice investors looking to make a quick profit. They purchase wines at the release price and then "flip" them -- sell them for more than the amount they paid. It's risky business, as some flippers are unable to recoup their investment upon resale, yet visit www.winebid.com, www.winecommune.com and other online sites and it's obvious that many wines are being bought and sold without any intention of being consumed.

There is no higher-profile stage for wine largesse than charity auctions, which raise millions for worthy causes. Bidders pay outrageous sums for wine and lifestyle lots, and write their purchases off on their taxes.

Inflated bids in the name of charity enhance the trophy-seeking mind-set for wines like Screaming Eagle and the $200-and-up Napa Valley Cabernet Sauvignons made by Bryant Family Vineyard, Colgin Cellars and Harlan Estate. The perception that Screaming Eagle was worth the $500,000 one bidder paid for a 6-liter bottle (the equivalent of eight standard bottles) of Screaming Eagle Cabernet Sauvignon at the 2000 Napa Valley Wine Auction (now Auction Napa Valley), allowed former winery owner Jean Phillips to continue to raise her current-release sales price.

Yet the uncertainty of buying wine for the trophy case or investment became apparent at the 2006 Auction Napa Valley, when M.K. Koo of Hong Kong "stole" a 12-magnum vertical of Screaming Eagle from 1992 onward for $460,000. That's 24 standard-size bottles selling for less than eight bottles did six years previously. The drop can be attributed to the downturn in the economy, and perhaps the announcement three months before the auction that former Napa Valley real estate agent Phillips had relinquished her Oakville brand and vineyard.

Phillips, who founded Screaming Eagle Winery in 1992, sold for an undisclosed sum in March to Charles Banks, the president of CSI Capital Management in San Francisco, and sports team owner/real estate developer Stanley Kroenke. At the time, Screaming Eagle's release price -- what it cost mailing list members to buy a bottle -- was $300; the wine sells in secondary markets for more than $1,500 per bottle.

Banks and Kroenke hired a new vineyard manager, David Abreu, who is replanting the Screaming Eagle vineyard. After the sale, Screaming Eagle founding winemaker Heidi Barrett left to devote her energies to her own brand, La Sirena Wines, and was replaced by Andy Erickson, a former Staglin Family Vineyard winemaker.

It's a shake-up, yes, but in the world of high-stakes winemaking, the only thing that matters to buyers of such wines -- collectors and investors -- is whether the bottles will remain in demand. Much of that depends on the ratings of critics Robert M. Parker Jr. and Wine Spectator magazine. Their 90-points-and-higher (on a 100-point scale) ratings drive up prices as more connoisseurs compete for a limited amount of product. High scores put new wineries on the map, and keep the hot ones hot.

"If we do our jobs well, we discover these wines on the way up, before they score high with critics," Bounty Hunter's Gadke says. "I also respect those who hold the line on pricing; others take advantage of a big score and immediately raise the price."

Scarcity plays a huge role in wine pricing. The fewer number of bottles of superior-quality wine that are made, the greater the demand for them, and that drives up the price. It's good, old-fashioned supply and demand, and wine, like antiques and artwork, is worth only what someone is willing to pay for it.

Yet even those with the will and the wealth to buy cult wines can't walk into a store and buy them. Nearly all the superstar California producers sell their wines to their mailing list subscribers, and place few bottles in restaurants. Screaming Eagle, Colgin, Williams Selyem Winery in Sonoma County and others have waiting lists to get onto their mailing lists. Those who fail to purchase their allocation of wine can be removed from the list, so they buy every year, at whatever the price, to keep their places in line.

By selling direct to consumers, high-profile wineries avoid using wholesalers and retailers to move their wines -- they eliminate the middlemen. A typical bottle of Napa Valley Cabernet Sauvignon with a suggested retail price of $50 was likely sold to a wholesaler for $25, who then sold it to a retailer for approximately $33. The three tiers of this distribution system take their cuts. But wineries much prefer to sell their products direct to consumers, via mailing lists and tasting room sales, wine clubs and direct shipping to customers in states that permit it.

Only a handful of Merlots and Chardonnays command $100 or more, although prices for low-production, high-scoring California Pinot Noirs are approaching $100 per bottle, and in growing numbers.

Still, the most serious collectors and flippers covet Napa Valley Cabernet Sauvignon-based wines. In the late 1970s, wines like Opus One, Caymus Special Selection and Beringer Private Reserve were the cult figures, the most expensive (priced between $50 and $60) from the state and considered the benchmarks in quality. While they've maintained their reputations, these wines are no longer bought and sold with the frenzy of a Harlan Estate. With fair suggested retail prices of $170, $136 and $115, respectively (fair being relative), Opus One, Caymus and Beringer's best wines are in no-man's-land -- too expensive for most consumers, yet not scarce enough or talked about enough -- to command Colgin-like prices.

Tom Shelton, president and CEO of Joseph Phelps Vineyards in St. Helena, has such a wine, the Joseph Phelps Insignia Napa Valley, a Bordeaux-style blend that has been made since 1974. Its quality and price have slowly increased over the years, but Insignia broke away from the Opus One/Caymus Special Selection/Beringer Private Reserve pack after the 2002 vintage was chosen the No. 1 wine in the world late last year by Wine Spectator.

It sells for $175 -- and it's sold out, even at 15,000 cases produced. When the 2003 Insignia is released in September, it will have a $200 price tag.

"To a certain level, pricing is a matter of supply and demand," Shelton says. "In the investment community, the market needs to go up or it collapses. It's the same with wine; Bordeaux from the 2005 vintage plays right into that."

Shelton points out that Insignia and its equally sought-after wine, the 2002 Phelps Backus Vineyard Cabernet Sauvignon ($175), are the results of years of labor-intensive development of the vineyards and fine-tuning of the winemaking techniques. Insignia and Backus didn't vault to a triple-digit price, they earned it over time.

"We want to be among a peer group," Shelton says. "If a wine is $250 to $300 a bottle and consumers think it's worth it, we don't want to be perceived as not being as good because our price is lower."

With wines that cost this much, perception is everything.

For most of us, we can only window shop and wonder what Screaming Eagle might taste like. Yet we also look at Ferraris in showrooms and at multimillion-dollar mansions, knowing we could never afford them. Wine is no different.

Hidden costs

Winemaking seems like a simple process, really -- the grapes are picked, the juice is fermented, the wine is aged and bottled, then it's sold to a consumer who enjoys it with dinner.

Yet the devil is in the details, and the details in vineyard, cellar, administration and sales/distribution processes all contribute to the price a consumer pays for wine. The myriad choices wine companies have in making, packaging and selling their bottles make it impossible to break down costs that apply to all, but consider these not-so-obvious factors that affect the final price of the wine.

Grape costs: Every year the Napa Valley Grapegrowers organization recommends per-ton prices for grapes purchased from that year's harvest. This year, for example, NVG suggests that Napa Valley Chardonnay grapes sell for between $2,400 and $2,900 per ton. Yet the annual California Grape Crush Report shows that Napa Valley Chardonnay fruit sold for as much as $7,083 per ton and as little as $300 per ton in 2005. Obviously, there is a lot of wiggle room in pricing.

Cabernet Sauvignon, the valley's best grape, sold for as much as $26,500 per ton in 2005, although the second-highest price paid was $12,500, according to the report. NVG recommends pricing at $3,900 to $4,800 per ton for 2006, though there will undoubtedly be numbers much higher and much lower.

Farming costs: It takes $25,000 or more per acre to plant a vineyard in Napa Valley and Sonoma County; to maintain it runs approximately $4,000 an acre per year. Meticulous care of the vines can run as high as $10,000 per acre. It takes three to four years for a new vineyard to produce a viable crop.

A finite supply: When Coca-Cola runs out of soda, it makes more. When a vintner runs out of wine, he/she must wait until the next vintage is ready to restock. Because winemakers can't "just make more," they hope to keep a particular vintage of wine in the sales channels until the new vintage is released, usually a year. Those who sell out early lose placements on retail shelves and restaurant lists.

Aging and storage: Red wines need up to three years in tanks, barrels and bottles before they're ready for market. Winery owners must wait to turn that investment into revenue, all the while incurring the expense of storing these wines in temperature-controlled cellars and paying employees to maintain the wines.

Taxes: In addition to property taxes, wine producers pay $1.07 per gallon in federal excise tax for wines with less than 14.1 percent alcohol. The rate jumps to $1.57 per gallon for wines of 14.1 to 21 percent -- a range in which many California wines fall. This expense is significant.

Transportation costs: Grapes move from vineyard to winery to warehouse to distributor to retailer/restaurateur, and as fuel prices rise, so will the price a consumer pays for a bottle. Most fine wine is shipped in refrigerated containers to protect it from heat, further adding to transportation costs.

Employees: Top-flight winemakers and viticulturists are the rock stars of the wine business, and their salaries are as negotiable, and varied, as those for professional baseball players, though on a far less grand scale. Vineyard managers, assistant winemakers, cellar and vineyard workers, truck drivers, marketers, sales managers/salespeople, administrative help -- it all costs money.

According to a salary survey conducted by Wine Business Monthly in 2005, the average annual base pay for Napa County winemakers was $94,114; it was slightly higher in Sonoma County, at $97,877. Vineyard managers in both counties earned an average base salary in the mid-$70,000s.

A growing number of Napa and Sonoma county vineyard owners provide housing for their seasonal workers and some full-time vineyard managers. While these growers typically charge a per-night rate for seasonal help, the fee is nominal and the grower absorbs the additional cost -- or passes it on to the winery buying the grapes.

Record keeping: The Bioterrorism Act passed by Congress in 2002 and enforced by the FDA requires wineries to keep meticulous records of any physical item that comes into contact with wine, including every grape, ingredient, bottle, cork, capsule and cardboard carton. U.S. wineries are to be in compliance by Dec. 9; those that aren't are subject to quarantine. Wineries have always kept records, both for internal use and to meet the guidelines of the regulatory Alcohol and Tobacco Tax & Trade Bureau (TTB). Complying with the Bioterrorism Act has forced wineries to hire employees who do nothing but document every step of the winemaking process and the goods used.

Consultants: Not every producer uses winemaking consultants, but many of the high-end producers do. The costs of such advisers vary wildly, depending on the type and amount of work they do, and their status as winemakers. One consultant might come in for a one-day tasting and assessment of a lineup of wines, while another might sign a long-term contract to perform all winemaking duties for the client. Top-gun consultants, such as winemaker Helen Turley and her viticulturist husband, John Wetlaufer, draw six-figure fees for a year of work per client.

Marketing: Making a wine doesn't mean that consumers will buy it; vintners have to lure them via marketing and public relations programs. The list of possible expenses includes press kits, sales sheets, brochures, newsletters, wine club operations, advertising, charitable donations of wine, travel expenses to promote the brand, competition entries, sending media samples, hosting lunches and dinners, and paying dues and assessments to marketing and lobbyist groups.

It wasn't that long ago that $75 was a lot to spend on a bottle of California wine. Now $100 is a midrange price for a top-notch Napa Valley Cabernet Sauvignon, and with the price of Screaming Eagle Cabernet soaring to $500 with the October release of the 2003 vintage, expect other producers to follow along.

Here are some of the most expensive wines made in California, with suggested retail prices, for their current or soon-to-be-released vintages (per 750-ml bottle). Prices may be higher in wine shops -- should you be lucky enough to find any of these wines there -- and even higher on restaurant lists.

Cabernet Sauvignon

2003 Screaming Eagle Napa Valley Cabernet Sauvignon ($500) The king of California cult Cabernet got new owners and a new winemaker in June, and they increased the price from $300 to $500 for the 2003 vintage, which will be released in October. It's to be seen whether the price hike and the departures of founding owner Jean Phillips and winemaker Heidi Barrett affect sales -- and prestige.

2002 Harlan Estate Oakville Cabernet Sauvignon ($300) Critic Robert M. Parker Jr. gave it a perfect 100-point score and told readers to "mortgage the farm" to buy this wine. A 99 score from Wine Spectator didn't hurt either. Owner Bill Harlan is also the proprietor of Meadowood Napa Valley resort; the world comes to Harlan, and his wines.

2002 Paul Hobbs Beckstoffer To Kalon Oakville Cabernet Sauvignon ($265) Here's a winning combination of a great winemaker (Hobbs), a smart grower (Andy Beckstoffer) and fruit from the famous To Kalon Vineyard. Parker gave the wine 99 points.

2002 Colgin Tychson Hill Napa Valley Cabernet Sauvignon ($250) Ann Colgin is an auctioneer and a wine consultant for Sotheby's, and her high-scoring, collectible wines bring top dollar at auctions. Her winemaker is talented Mark Aubert.

2002 Joseph Phelps Backus Vineyard Oakville Cabernet Sauvignon ($175) This wine gets double billing with the Phelps Insignia Cabernet-based blend (also $200), which was ranked the No. 1 wine in the world in 2005 by Wine Spectator. Backus is much scarcer than Insignia, at just under 1,000 cases, and because it's made from a single vineyard, it's more difficult to make than the multisource Insignia.

Pinot Noir

2004 Ambullneo Vineyards Canis Major California Pinot Noir ($95) This hot new producer has strong support from Parker, and Bay Area sommeliers love this blend of grapes from the Santa Maria Valley and the famed Hudson and Hyde vineyards in Napa Carneros.

2004 J. Rochioli Winery East Block Russian River Valley Pinot Noir ($90) Any Pinot Noir made by this pioneering Russian River Valley grower/maker has critics, mailing list customers and sommeliers drooling for more. The East Block is its most expensive Pinot Noir, and just 274 cases were made. Joe Rochioli also sells grapes to a very short list of peers, including Williams Selyem Winery and Gary Farrell Vineyards & Winery.

2003 Williams Selyem Winery Precious Mountain Sonoma Coast Pinot Noir ($85) The gold standard for Pinot Noir production, Williams Selyem showed others how to do it. After Burt Williams and Ed Selyem sold the winery to John Dyson in 1998, winemaker Bob Cabral has continued to focus on vineyard expression in the 17 different Pinot Noirs he makes, most of them from single sites.

2003 Etude Heirloom Carneros Pinot Noir ($80) Respect for winemaker Tony Soter, who has an outstanding track record over 30 vintages in Northern California and Oregon, supports this wine, which is made from several low-yielding heirloom Pinot Noir clones.

Syrah

2002 Lewis Cellars Cuvee L Napa Valley Syrah ($175) Lewis' superb "regular" Napa Valley Syrah is spectacular, one of The Chronicle's 10 favorite wines in 2005. This cuvee, or blend, of the best lots of Syrah climbs to a higher rung on the ladder in character and consumer demand.

2003 JC Cellars Pourquoi Pas Sonoma/Cote Rotie Syrah ($135) A cheater's choice, as grapes from Cote Rozier in the Cote Rotie region of the northern Rhone Valley were blended by Jeff Cohn with fruit from the Rockpile Vineyard in Sonoma County. The price reflects the uniqueness of the wine and its tiny 125-case volume.

2003 Alban Vineyards Seymour's Vineyard Edna Valley Syrah ($85) There are more expensive Syrahs out there, particularly from Napa Valley (see above), yet keep an eye on John Alban, who has achieved cult status with his Rhone-style wines in Santa Barbara County. Prices are sure to creep up as a way of slowing down sales.

Chardonnay

2003 Kongsgaard The Judge Napa Valley Chardonnay ($175) Parker points: 99. Winemaker John Kongsgaard's reputation: stellar. The judge: Kongsgaard's late father, Thomas, a former Napa County judge. What it costs to buy this wine at Restaurant Gary Danko: $450.

2003 Paul Hobbs Cuvee Agustina Richard Dinner Vineyard Sonoma Mountain Chardonnay ($100) Hobbs makes this list twice (see Cabernet Sauvignon), because every wine he touches turns to gold in his pocket. Wine quality, acclaim from critics and associations with great vineyards allow Hobbs to command three figures for this Chardonnay.

2003 Kistler Cuvee Elizabeth Sonoma Coast Chardonnay ($90) Sonoma County Chardonnay has its own cult producers, none more accomplished than Steve Kistler and longtime enologist Mark Bixler. Publicity-shy and hard to find in sleepy Sebastopol, they have consistently made brilliant Chardonnays since 1979, and have a mailing list that's nearly impossible to crack.

2003 Amuse Bouche Napa Valley Red Wine ($175) A Merlot-dominant wine made in the Pomerol (Bordeaux) style with a splash of Cabernet Franc by top consultant and former Screaming Eagle winemaker Heidi Barrett.

2003 Martinelli Jackass Hill Russian River Valley Zinfandel ($90) Old vines grown on a spectacularly steep vineyard produce a monster wine with an alcohol level of around 17 percent that some Zin lovers crave. It scores consistently in the 90s. And what's not to love about the name?

-- Linda Murphy

Follow that bottle: A case study

You've purchased a bottle of Napa Valley Cabernet Sauvignon from the store for $50, the winery's suggested retail price. It's up to your taste buds to decide if you got your money's worth, but how much profit did the winery make on that bottle? Less than you might think.

Here is a cost breakdown for a bottle of Napa Valley Cabernet Sauvignon made from grapes that cost $4,000 per ton -- the low-end average recommended by the Napa Valley Grapegrowers Association for the 2006 harvest. These figures are averages, as costs can vary widely, and don't factor in prices inflated by scarcity and demand.

Revenue per bottle

Total revenue: $32

The typical California winery sells 50 percent of its inventory to wholesalers who distribute nationally; 30 percent through self-distribution within California to retailers and restaurants; and 20 percent directly to consumers through tasting room, Internet, wine club, mailing list and direct-shipping sales to consumers in states that permit it. This mix of sales generates an average of $32 per bottle in revenue for a Napa Valley Cabernet Sauvignon with a suggested retail price of $50.

Expenses per bottle

Production: $12

(grapes, processing, bottling, glass, corks, capsules, labels)

Sales and marketing: $10

Administrative: $5

Total cost: $27

The bottom line

$32 revenue minus $27 cost = $5 net profit per bottle for the winery

Note: Retail and wholesale costs account for much of the balance of the $50 suggested retail price. Administrative and sales/marketing costs include allocated indirect overhead costs as well as direct costs.

Source: Rob Morris, Senior Manager, MKF Frank, Rimerman & Co. LLC.

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